Agglomeration economies or external economies of scale refer to the benefits from concentrating output and housing in particular areas.
If an area specialises in the production of a certain type of good, all firms can benefit from various factors such as:
- Good supply channels
- Supply of trained workers
- Infrastructure built specifically for the industry
Due to agglomeration economies, people and firms often concentrate in particular areas. For example, people tend to move to cities where is there is greater choice of jobs, social activities and specialist services
However there is always the risk of dis-economies of scale, where firms become too big and average costs start to rise.